The ongoing global economic crisis has heavily impacted the economy of Bangladesh. Although the government is currently negotiating with development agencies and international financial institutions for loans, the high rate of inflation, power shortages, volatile exchange rate and quickly depleting foreign exchange reserves are worsening the situation.
To tackle the crisis, the government has already undertaken a series of policy measures with some still in the pipeline. Increasing the Foreign Direct Investment (FDI) inflows can be one of the key ways to mitigate the crisis. To create an FDI-friendly environment, some existing legal and policy frameworks need to be amended.
In regards to FDI in Bangladesh, there is no limitation pertaining to foreign equity participation except for the four categories of arms, ammunition and other defence equipment and machinery, forest plantation and mechanised extraction within reserved forests, production of nuclear energy and security printing where government reserves investment.
Though at the first instance it shows that there is no legal barrier to foreign investment in Bangladesh, upon a closer look it becomes evident that FDI's are regulated by a number of laws and policies.
The primary regulatory legislation here is the Foreign Private Investment Promotion and Protection Act 1980 which has been enacted to promote and protect foreign investment in Bangladesh. However, this short Act of 9 sections enacted 42 years ago is not enough to protect the foreign direct investment of today.
Though the title of the Act suggests that it is about foreign private investment promotion and protection, the Act has few sections relating to the protection of foreign investment and nothing concrete has been mentioned about the promotion of foreign investment.
Section 3 of the Act states that the government may sanction establishments with foreign capital for any industrial undertaking. 'Industrial undertaking' has been defined in the Act as an industry, establishment or other undertaking engaged in the production or processing of any goods or in the development and extraction of mineral resources or products.
This means this Act does not give any protection to the service industry, IT sector etc and needless to say, these sectors now play a vital role in the economic development of Bangladesh.
Another issue with Section 3 is that this section gives wide power to the government to sanction any establishment with foreign capital of an industrial undertaking which may be subject to conditions as the government may deem fit to impose. The Act does not define what sort of condition and under which circumstances the government can impose the conditions. This makes a legal loophole which can create the scope for bureaucratic red tape.
Section 4 of the Act states that the government shall accord "fair and equitable" treatment to foreign private investment which shall enjoy full protection and security in Bangladesh. However, the Act does not elaborate on the term "fair and equitable."
When the Act talks about fair and equitable treatment, the standards must be specifically set out. Such a wide term often gives no protection to foreign investors at all.
Section 7 of the Act states that foreign investment shall be protected against expropriation or nationalisation. This section further states if in any case, any foreign investment needs to be taken over or nationalised, adequate compensation must be given.
The Act defines adequate compensation as an amount equivalent to the market value of the investment expropriated or nationalised immediately before the expropriation or nationalisation.
However, adequate compensation should not only be limited to the market value of the investment only; the loss of profit, loss of opportunity and other factors should also have been included to compensate adequately. The Acquisition and Requisition of Immovable Property Act (2017) can be an example in this regard since it considers all these factors when giving compensation.
Section 8 of the Act is about the repatriation of investment. This section guarantees explicitly the transfer of capital and the returns from it in the event of liquidation of an industrial undertaking. In this case, the repatriation of proceeds from the liquidation is guaranteed.
Furthermore, the section mentions that the guarantee is subject to the government's right to exercise in the event of exceptional financial and economic difficulties in accordance with the applicable laws and regulations.
However, the reality is different. Repatriation of funds is not as easy as the Act suggests. There are a lot of regulatory issues involved. Provisions under Foreign Exchange Regulation Act 1947 and Bangladesh Bank's Guidelines for Foreign Exchange Transaction 2018 need to be complied with. The strict reporting requirement and tax issues make the repatriation of funds even more difficult.
Another major drawback is that this Act does not have any provisions relating to dispute resolution mechanisms. When any dispute arises relating to foreign investment projects, foreign investors rely on the bilateral treaty between the countries and their joint venture agreements.
This results in taking the dispute into an international forum for arbitration. If this Act had a proper grievance redress mechanism, dispute settlement process and proper implementation of the law, disputes would have been settled within the country.
The Foreign Private Investment (Promotion and Protection) Act 1980 as the primary regulatory framework is not sufficient to meet the challenges of today. Therefore, it is imperative that reforms are made to this Act.
It should include provisions for promoting all sorts of business ventures such as joint venture investments, PPP models etc. Industrial undertakings should not only be limited to specific industries only. It should adopt the changing nature of booming business sectors including the IT industry, service industry etc. The Act should adopt provisions ensuring the promotion of businesses.
Other major domestic laws that apply to foreign investment include Bangladesh Export Processing Zones Authority Act 1980, Bangladesh Economic Zones Act 2010, Public Private Partnership Act 2015, Bangladesh Investment Development Authority Act 2016, Companies Act 1994 etc.
All these acts provide certain incentives, protection and restrictions on foreign investment. The Foreign Investment (Promotion and Protection) Act should be reformed in such a way that the essence of other foreign investment-related laws is retained.
Foreign investment plays a major role in developing the country's economy and can help it achieve its socio-economic objective. Favourable condition is needed to ensure the flow of foreign investment and an appropriate legal framework is a must. Laws should be amended to meet the changing needs.
To begin with, the 42 years old Foreign Direct Investment (Promotion and Protection) Act 1980 needs to be amended.
Zareen Rahman is a Barrister-at-Law and an Advocate at the Supreme Court of Bangladesh.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.